Shoppers in recent years have embraced buy now, pay later loans as an easy, interest-free way to buy everything from sweaters to concert tickets.
However, the loans are typically not listed on consumers’ credit reports or factored into their credit scores. That has fueled fears that users may be taking on excessive debt that is invisible to both lenders and financial regulators.
When Apple announced in February that it would begin reporting loans made through its Apple Pay Later program to Experian, one of the three major U.S. credit bureaus, it seemed to be a turning point for the fast-growing buy now, pay later category ” to be .
But none of the other major pay later providers have followed Apple’s example. And while credit reporting agencies and lenders say they are interested in finding a way to work together, the gap between the two sides remains wide – so wide that some pay-later companies are considering setting up an alternative credit reporting agency for the Consider processing your loans.
“I haven’t really seen any significant progress,” said David Sykes, chief commercial officer of Klarna, one of the largest pay later companies.
Buy now, pay later loans allow consumers to pay for their purchases over a longer period of time, often in four installments over a six-week period, interest-free. They grew in popularity during the pandemic as they contributed to an online shopping boom. The rapid growth continued: retailers attributed their record-breaking Christmas sales, among other things, to the popularity of pay-later products.
But economists at Wells Fargo warned last year that “phantom debt” from pay-out loans “could create significant problems for the consumer and the broader economy.”
The credit reporting agencies argue that including deferred loans in the reporting system would benefit consumers, who would be able to build credit by repaying loans on time, and lenders, who would gain greater insight into consumers’ borrowing.
The pay later providers agree – theoretically. However, they fear that reporting the loans would harm their customers. Existing scoring models penalize borrowers who take out a lot of loans in a short period of time. This could be a problem for the pay later industry because, unlike credit card purchases, every pay later transaction is treated as a credit.
Some consumer advocates share this concern.
“The credit reporting system is a system that assumes monthly payments, it assumes longer-term loans and it’s just not really designed to handle ‘buy now, pay later,'” said Chi Chi Wu, senior attorney at the National Center for Credit Reporting Consumer law. “It’s a square peg, round hole kind of thing.”
The consumer reporting industry in the United States has evolved over the decades into a complex web of independent and sometimes competing players. Financial institutions — banks, mortgage brokers, auto lenders and others — report loan information to three major credit reporting agencies: Equifax, Experian and TransUnion. These bureaus collect the data and make it available to lenders and consumers, as well as companies like FICO and VantageScore, which use it to create credit scores.
The major credit bureaus say they took into account the concerns of the pay-later loan industry more than two years ago when they created a category for loans. This should allow FICO and VantageScore to adjust their models to account for the unique characteristics of these loans – and ultimately incorporate them into credit scores without penalizing users. (For now, the loans would be included on consumers’ credit reports but not visible to lenders or integrated into scoring models.)
“It’s been a long road, but I think we’ve finally reached a turning point in the momentum toward releasing the data,” said Liz Pagel, senior vice president at TransUnion, who oversees the company’s consumer lending business.
However, the pay later industry argues that the credit reporting system is not yet fully developed. For one thing, the credit reporting agencies primarily receive data from lenders on a monthly basis, while deferred loans are typically paid out biweekly. (All three major credit bureaus said that while monthly reporting is the default, lenders can report more frequently if necessary.)
“It’s just not fit for purpose yet,” said Klarna’s Mr Sykes. “And we haven’t seen anything from authorities to suggest that will be the case.”
Klarna reports loans to TransUnion and Experian in the UK, where the system works slightly differently. A competitor, Affirm, reports some longer-term loans to Experian in the United States and hopes to “eventually” report shorter-term loans as well.
Other major pay later providers, such as Afterpay, PayPal and Zip, said their concerns about how pay later loans were handled by the credit reporting system had not been addressed.
“Our members continue to say it is still inadequate,” said Penny Lee, president of the Financial Technology Association, which represents many of the largest pay-deferred companies.
However, that argument received a blow in February when Apple announced that it would begin reporting loans made through its Apple Pay Later product – essentially a copy of the pay-in services offered by Klarna, Afterpay and similar firms. Four loans – awarded to Experian.
Apple declined to comment, but said in an earlier press release that while the loans wouldn’t immediately count toward credit scores, the company saw the move as a move to “give users the opportunity to further build their credit score.”
Silvio Tavares, CEO of VantageScore, said in an interview that Apple’s announcement demonstrates the credit reporting system’s ability to handle deferred loans.
“It’s difficult to be more sophisticated than Apple,” he said.
Far from joining Apple, however, pay later providers appear to be exploring a system outside of the traditional credit reporting infrastructure. Last year, two former industry executives founded Qlarifi, a data aggregation platform specifically for pay-defer loans. (Mr. Sykes from Klarna is an investor.)
Alex Naughton, who left Klarna last year to help found Qlarifi and is now its chief executive, portrays the company as a more flexible, tech-savvy approach to credit reporting. It will be able to collect data in real time rather than monthly and exchange, as is common practice with the major credit reporting agencies.
“I don’t think the existing infrastructure can adapt so quickly,” he said.
Lenders and credit agencies agree that deferred loans are unlikely to remain outside the credit scoring system forever. But it’s unclear what will break the deadlock. Ultimately, industry experts say it will likely come down to one of two things: either regulators will force deferred companies to start reporting, or market forces will.
“Either there will be a market change or a regulatory change,” said Shane Foster, a lawyer specializing in financial regulation at Greenberg Traurig.
At least at the federal level, there does not appear to be any regulatory action in the near future. The Consumer Financial Protection Bureau has indicated that it would like to integrate deferred loans into the credit reporting system. But while the agency oversees the credit reporting industry and enforces policies to ensure data is accurate and consumer rights are protected, it has not sought to require private companies to provide data to the bureaus.
Several states, including California, have taken steps to regulate the pay-later industry, and others, including New York, are considering it. However, these efforts would not require the loans to be immediately reported to the credit bureaus.
Banks and other traditional lenders report to the credit bureaus because the data is helpful in making credit decisions and because it serves as a tool for borrowers to repay: if they don’t, their credit will suffer.
Providers that pay later may not feel much pressure to start reporting as their business grows and most consumers make their payments, said Ted Rossman, senior industry analyst at Bankrate. But as the economy slows and more consumers fall behind on their payments, lenders may decide they need to join the credit reporting system to assess borrowers’ reliability.
“Defaults are pretty low, the job market is solid, so that may not have created the same urgency,” he said. “’Buy now, pay later’ doesn’t have a real delinquency statement yet. People keep warning about it. Maybe that’s ultimately what will change the spores here.”
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2024-04-23 09:03:55
www.nytimes.com
